How do you deal with an owner that asks you to put money upfront in a bank account?

January 25, 2017

by a searcher from IESE Business School in Barcelona, Spain

I'm in advance discussion with an owner. We signed an NDA, he shared detailed financial information, I visited his offices, I visited some of his clients and we are starting to discuss price.

I sent him a LOI. The only thing missing in it is the price which we are currently discussing.

He says that two of his advisers said that I should put 15% of the amount upfront in a bank account.

Additionally, he says that if the deal falls apart, he should be compensated for his time and costs.

I am sure lots of you had to go through a similar situation. Anybody could share experiences and how they dealth with it? Best practices?

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Reply by a searcher
from INSEAD in 10 Rue de la Chasse, 77000 Melun, France

Dear David, Although coming from an experience across the Atlantic (Europe), you should treat this request as you would any other inter-mediation as a searcher: what's the underlying reason and is there another confidence building measure? What do you have to compensate him for (time alone is not enough, when one is selling a business) ? What about his own demonstration of commitment ? IMHO, if he's doubting that you could finance the deal, now is the time to bring some of your investors to the conversation, their track record should be a better vetting than a bank deposit. If he insists in being compensated for his cooperation, he should seek other buyers than entrepreneurs because the only compensation should be for the party that committed due-diligence expenses, and that is not him. All the best in your endeavor. A.C. (INSEAD 14D)

Reply by a searcher
from University of Southern California in 2121 Avenue of the Stars

David - I went through a similar process on a transaction. Every situation is different with different sensitivities of the seller, but we negotiated a deposit into Escrow and the instructions to escrow simply said if items shared to date are proven to be materially different from how represented to us (you can get somewhat detailed as how you do in the PSA agreement in the Reps & Warranties section), then the depsoit is fully refundable to buyer. And to be safe, you can always say if a mutually agreed upon PSA hasn't been consummated by a set date, escrow is terminated subject to mutual extension of timeline by both parties etc. Essentially - this would be your failsafe to walk away with all your $ by a deadline. Hope this helps

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